It’s Democracy, Stupid: Reappraising the Middle-Income Trap

May 1, 2014, pp. 33

The causes and reasons for countries’ economic growth and development have long been a challenging subject for research and debate. It is observed that while many countries experience high growth when they are low-income countries, once they become middle-income countries rapid growth is often followed by economic stagnation, with the potential for increasing social unrest as a result. A key puzzle is therefore why many middle-income countries fail to sustain suf-ficient economic growth to become high-income countries. A relatively recent concept in this debate is that of the Middle Income Trap (MIT), which argues that countries encounter a series of obstacles when trying to adapt their econo-mies and comparative advantages to become more specialized market econo-mies. In other words, the very same factors that fueled growth in the early stag-es act as a hindrance at the middle-income level, slowing down and eventually causing a stagnation of the growth process, if the correct policies are not im-plemented. This study seeks to reappraise the MIT concept by going beyond a mainstream analysis, which focuses mainly on economic aspects of growth/stagnation. Accordingly, while prudent economic management and pol-icies are vital to avoid the MIT, factors relating to governance, institutions, in-clusive growth, and education, among others, can underlie and play a determin-ing role in explaining failure or success in sustaining economic growth. There-fore, non-economic dimensions are fundamental for any reform or structural change, and, as is argued in this paper, democratic governance can serve as a useful proxy for many of these factors.